Ok guys. I specially made an account to this site hoping i can help some of you guys who have this frustrating problem to fix it.
I have spent the last 3 days searching forums like these to fix the pixelated problem and the bad quality problem and didn't find the answer.
Since today i fixed it on my own and i really hope the guys that try this get it fixed as well. Maybe the things i did sound a bit weird but the quality is fine now and have no problems at all.
Here is what i did after frustrating 3 days
1: Went to My computer-Right click-Device manager- Dispay Adapters and uninstalled my video card
2: restarted the computer
3: Installed nvidia video drivers. Didn't matter which ones, but preferably the latest ones
4: uninstalled all other players which had codecs attached to them ( bs.player). Also uninstalled all separate codecs on my pc
5: Installed xvid codec from here
Download the XviD Codec - XviD Movies and also installed Ac3 filter
6: Installed VlC media player 1.0 and set the video rendering to DirectX
6: restarted again
IOt works like a charm. Also if you try this let the aero enabled VLC will take him out when a move starts
I had this configuration 1 week ago aswell. But suddently something changed after 1 month of good quality videos and i started having pixelated videos, weird but true. I have no idea how it got to that but i fixed mine this way
I know it sounds simple just installing VLC and some simple codecs but this did it for me
I hope this helps some of you
cheers